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October 23, 1990


The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:


Plaintiff, Vigilant Insurance Company, ("Vigilant"), brings this action claiming violations of: (1) § 10(b) and rule 10b-5 promulgated thereunder, of the Securities and Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j (1982); (2) 18 U.S.C. § 1961 et seq. of the Racketeer Influenced and Corrupt Organizations Act ("RICO"); (3) common law fraud; (4) common law conversion; and (5) for money had and received. Defendants are C. & F. Brokerage Services ("C & F"), M. & M. Institutional Services, Inc./Broadway Enterprises, Inc. ("M & M"), Sal Fontana, Charles Chiaramonte and Frank Procida, (collectively the "finders"). Only one defendant, Frank Procida, a principal of C & F, moves to dismiss counts 1-5 and 7-8 of the amended complaint.*fn1 Vigilant cross-moves pursuant to Fed.R.Civ.P. 15(a) to further amend the complaint to add Ralph Anselmo as a defendant, to enter a default against M & M, and to sever and continue the action as to the remaining defendants.


Vigilant, a New Jersey corporation, insures M.J. Meehan & Co. ("Meehan"), a partnership with its principal place of business in New York, against losses occasioned by employee dishonesty. Meehan is a New York Stock Exchange specialist firm engaged in the buying and selling of only specific securities that are listed on the exchange, which insures a continuous trading market in those securities. C & F is a New York corporation. M & M is a foreign corporation which has its principal place of business in New York. Both C & F and M & M are companies which arrange stock loans with other brokerage firms. Meehan enlisted C & F and M & M as "finders," namely, middle-men, to obtain stocks from other brokerage houses in order to fund Meehan's commitments to its own clients and cover its position in the market. In turn, Meehan provides cash collateral to the finders for the loans. Once Meehan covers its position in the market, it returns the stocks and receives back the collateral. In addition to receipt of its collateral, Meehan is supposed to get an interest payment, or "rebate." Meehan claims that it never received proper rebates in the aforementioned finder transactions.


Meehan alleges that C & F and M & M schemed to defraud it of rebates on its stock borrowings and loans. Fraud is posited under three federal statutes: mail fraud (18 U.S.C. § 1341); wire fraud (18 U.S.C. § 1343); and securities fraud (18 U.S.C. § 1961 and 15 U.S.C. § 78j). Each type of fraud constitutes the basis for a predicate act under RICO.

Rule 9(b) of the Federal Rules of Civil Procedure, read together with rule 12(b)(6) requires that allegations of fraud be made with particularity. This is to insure that a defendant has fair notice of the claim, to protect a defendant's reputation and goodwill, and to reduce the number of strike suits. Di Vittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242 (2d Cir. 1987). The complaint must specify the time, place, speaker and content of the alleged fraud. Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986). When there are multiple defendants, allegations of fraud may not usually be made collectively, but in this case where the individual defendants, including Procida, were principals of C & F and M & M, claims may be made collectively. See Ballan v. Wilfred American Educational Corp., 720 F. Supp. 241, 253 (E.D. N Y 1989) (fraud in SEC filings may be collectively alleged as to principal and inside directors).

Individual liability will attach if the corporate principal was personally connected with the wrong. Brunswick Corp. v. Waxman, 459 F. Supp. 1222 (E.D.N.Y. 1978), aff'd, 599 F.2d 34 (2d Cir. 1979). In the case at bar, it is alleged, albeit sketchily, that Procida was personally involved in the scheme. Further:

  [i]n the case of a small corporation, where the
  boundaries between the corporate entity and the
  individual director are often permeable, it cannot
  be said as a general rule that allegations
  sufficiently directed against the corporate entity
  fail to detail, for purposes of Rule 9(b), the
  actions of its director with sufficient
  particularity. Nor does this contravene the
  rationales for Rule 9(b). Currie v. Cayman
  Resources Corp., 595 F. Supp. 1364, 1372 (N.D.Ga.
  1984), aff'd in part and rev'd in part,
  835 F.2d 780 (11th Cir. 1988).

It is permissible to plead upon information and belief when the facts necessary to state a cause of action are wholly within the control of the party who is alleged to have committed the wrongdoing, for it would be unfair to allow a party to escape liability merely because a principal employee forms an impenetrable barrier concealing details of the fraud. Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir. 1986). This, however, necessitates the inclusion of facts upon which the belief is founded. Id. In this case a sufficient statement of the facts is included in the appended statement by William Meehan as to his investigation in the matter. The corporate structure of C & F and the extent to which Procida controls it are matters which are critical in determining liability in this case. Information regarding these matters is wholly within the control of Procida and C & F. Therefore, I find Vigilant has sufficiently stated facts to support its contentions in the amended complaint and attached sworn statement to preclude dismissal at this juncture. Vigilant is hereby given leave to proceed with discovery.

Turning now to Procida's claim that the securities law frauds must be dismissed, I note that Vigilant's fifth cause of action alleges violations of § 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 promulgated thereunder. These provisions prohibit making false and misleading statements "in connection with the purchase or sale of any security." (emphasis added)

  The purpose of § 10(b) and Rule 10b-5 is to protect
  persons who are deceived in making securities
  transactions — to make sure that buyers of
  securities get what they think they are getting and
  that sellers of securities are not tricked into
  parting with something for a price known to the
  buyer to be inadequate or for a consideration known
  to the buyer not to be what it purports to be.
  Chemical Bank v. Arthur Andersen & Co.,
  726 F.2d 930, 943 (2d Cir. 1984), cert. denied, 469 U.S. 884
  [105 S.Ct. 253, 83 L.Ed.2d 190] (1984).

The Act is directed at fraud which relates to the value of the securities transaction as an investment. Therefore, to adequately state a cause of action, the misrepresentation must relate to the value of the security. It is clear in the case at bar that the fraud involved stock borrowings and loans. Specifically, Vigilant alleges a scheme whereby C & F and M & M deprived Meehan of interest on the collateral for stock loans. Thus, the fraud alleged regards retention of interest on the collateral and a diversion of proceeds, neither of which affects ...

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